Finance and Funding in Travel and Tourism

This report discusses the importance of cost and volume in financial management, pricing methods, and factors influencing profitability in the travel and tourism sector. It also includes a financial ratio analysis of The Restaurant Group Plc. (TRG).

FINANCE AND FUNDING
IN TRAVEL AND TOURISM

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
1.1 Importance of cost and volume in financial management................................................1
1.2 Pricing method .................................................................................................................1
1.3 Factors influencing profitability of travel and tourism sector..........................................3
TASK 2............................................................................................................................................4
Covered in PPT.......................................................................................................................4
TASK 3............................................................................................................................................4
3.1 Financial ratio analysis of The Restaurant Group Plc. (TRG).........................................4
TASK 4..........................................................................................................................................10
Covered In PPT....................................................................................................................10
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Management accounting information is useful for company. This information helps
management team to make effective decisions to flourish in its functioning. Finance is the main
need of the company by which it can track its expenses and incomes in the best possible way.
(Travel and tourism, 2017). This report deals with Merlin Entertainment Company which is
engaged in providing entertainment services to its customers. The cost is an important element in
accounting information. The report deals with various pricing methods which should be adopted
by the organisation to fully optimised its funds. The currency exchange rate is the factor
influencing profitability of the company. Different ratios covered like gearing ratio, efficiency
ratio and liquidity ratio are essential to company to pay off its obligations. The working capital
must be sufficient to cover day to day expenses in effectual manner.
1.1 Importance of cost and volume in financial management
Both these elements are considered as two sides of a coin which can never get separated
because cost is the price and volume is quantity of product and services which are provided by
company to its customers. Volume of product can be determined by cost. Profit increases when
prices of products will rise and cost increases when volume of product decreases (Laws, 2011).
There is a direct relationship between cost and profit and reverse between volume and cost.
Companies use them to figure out their income and expenses on an exact basis to earn
more profit than others to survive for longer duration in the market. Cost basically means actual
expenses which consists in producing or selling goods and services in market. Volume refers to
quantity of products that are visible in nature (Medlik, 2012). Profit is generally calculated by the
selling price minus actual cost of product. Cvp analysis helps companies to calculate amount
remained from sales revenue after deducting all the expenses that have been occurred during
whole year.
1.2 Pricing method
 Cost based pricing: It refers to the method that includes the ample percentage of the
profit mentioned by the company like Merlin Entertainment Pic as a margin that is added
to the cost to know the last price. In cost pricing method production cost is added to the
product cost to determine the selling price (Moutinho, 2011). This methods help tours
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and travels company to determine their actual selling cost .this type of pricing has two
types are as follows:
 Cost plus pricing: This method is the easiest method of finding product cost. In this
fixed percentage of profit is taken to analyse the final price. For example: Merlin
entertainment pic company has total cost 80 per unit and it adds 20 per unit as a profit
then the last price of their product is 100 per unit.
 Mark up pricing: In this method a fixed amount of cost of product is added to the price
of the product to get the final selling price (Lew, 2011). It is the most common method
used by the retailers in the market to get more profit than others.
 Demand based pricing: In this method prices are determined on the basis of demand
because demand have direct connection with price as piece increases demand also
increases and when price falls demand also decreases so in this method cost totally
depends upon demand.
 Competition based pricing: This method basically refers to the strategy made by the
company for their competitors in the market (Tham, Croy and Mair, 2013). Firstly they
consider the price of their competitors to set their price so that they can earn more profit
than others.
Other pricing methods. There are some more pricing methods which are as follows:
 Value pricing. In this method the company like Merlin Entertainment Pic tries to honest
to their existing customers and provide them their best services to retain them at utmost
level (Reisinger, 2013). In this method, the company needs to apply the prices as per the
value of products to consumers as all other companies like Thomas cook offers to its
customers.
 Target return pricing. This methods help companies to achieve their fixed target in
return of investments done by them for that particular product to earn maximum profit.
 Going rate pricing. According to this method the company fix the product price after
analysing the whole market of that product like Merlin Entertainment Pic offering its
product price to customers after analysing the whole market. In this all companies takes
decision all together.
 Transfer pricing. These methods include dealing of goods and services within the sales
department of the organisation. This method is performed by the departments to manage
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profit and loss in the organisation (Molz, 2012). In this one department can sell its
product at very low price to the other department within an organisation. Sometimes
transfer pricing are used to show more profits by making fake sales statement of the
product. Transfer pricing is very useful sometimes.
1.3 Factors influencing profitability of travel and tourism sector
In the present business environment with the economy, every business firm's position and
profitability in market gets affected with the various factors which directly or indirectly related
with the business operations of organization (Lee and Brahmasrene, 2013). It is also recognised
that the firms ta internal level needs to analyse various major factors that influence business
operations. In present scenario, travel and tourism sector is also gets affected with these factors
as they are operating in competitive market of industry as well as development of various big
opportunities have been available for them in market. In this context, there are many factors have
been considered which that provides major impact on the profitability of Marlin entertainment
which is global organization in travel and tourism sector.
 Competitors policies: It is considered as the major factor that affects the profitability of
company as with effective strategies competitors will be able to achieve market share and
also able to capture the customers from the market (Chen and Shoemaker, 2014). In this
scenario, the company also gets affected with the rise in marketing strategies of
competitors like Thomas cook and TUI group etc. Further, by reducing the prices of tour
packages and product the competitive will provide major effect to the business operations
of organization.
 Currency exchange rate: Continuous fluctuation in currency exchange rates also
provided major impact on the profitability of travel tourism sector companies as it
increases the prices of products and services (Buhalis and Foerste, 2013). It also makes
changes in perception of travellers to select the tour and entertainment packages of small
business enterprise in UK which associated with the travel and tourism sector. Moreover,
it can be said that rise in currency exchange rates will make an influence on the
companies by reducing the profitability in market.
 Terrorism: It is a continuous growing problem which has provided major impact on the
business operations of tourism industry (Bujosa, Riera and Torres, 2015). Rise in terrorist
attacks with the British countries also influenced the perception of travellers and provided
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a threat to travel in different geographical areas. Further, it has indirectly affected the
behaviour of people in country which leads to reduction in demand of travel and tourism
business operations.
 Changes in government legislations: There is major impact of legal policies of
government on the business operations of firms in travel and tourism sector. In this
context, the government policies related to safety and consumer expectation and rights
will affect the strategies of firm to increase the profitability. Many restriction are made by
the government of various other countries on the business operations that directly affects
the profitability of company in international market.
 Rise in income level: Apart from the previous analysis, rise in income level of
consumers has increased the opportunities for business to influence the people for selling
there tour packages as well making effective practices that will satisfy their needs
(Dolnicar and Ring, 2014). With the economic development of country, the buying
power of people has been increase due to rise in their per capital income. These major
economic development will create various opportunities for cited organization to
introduce various new and innovative business operations to accomplish the needs of
consumers and maximize profits as per requirements.
Hence, it can be said that these major factors will directly and indirectly provide major
impact on the profitability of company and also affects it strategic position in market.
TASK 2
Covered in PPT
TASK 3
3.1 Financial ratio analysis of The Restaurant Group Plc. (TRG)
Liquidity ratios:
The liquidity ratio means the ability of company to pay off its debt obligations. Margin of
safety is also measured through this ratio. It includes current ratio and quick asset ratio. It is
required to pay short- term debts of the organisation. Current ratio means that company has to
pay off debts from current liabilities and current assets (De Lecea, Smit and Fennessy, 2016).
This ratio is widely used to measure the liquidity of funds of the company. Formula for current
ratio is- Current Ratio = Current assets / Current Liabilities. Current assets are those which are
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required to turn in cash from within one year. Example- Accounts receivable, prepaid expenses
etc. Current liabilities are those liabilities are those liabilities which are to paid within one year
of span, Example- Accounts payable, outstanding expenses. Next is quick asset ratio. It is also
called acid test ratio, it means how capable is firm to pay off its obligations in most liquid assets
(Balanis, 2016). Liquid assets are those assets that can be quickly converted in cash. Most of the
assets are highly liquid except inventory or stock. Formula is- (cash+ short term investments+
accounts receivable) / Current liabilities.
2014-15 2015-16
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.28
0.36
Illustration 1: Current ratio
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2014-15 2015-16
0
0.05
0.1
0.15
0.2
0.25
0.13
0.2
Illustration 2: Quick asset ratio
Analysis:
Liquidity ratio is very important for firm which are capable to pay off its obligations in
short period. Ideal current ratio 2:1 is considers to be good for company as it can pay off
liabilities. In illustration 1, current ratio is good as assets are more than liabilities. Ideal quick
ratio 1:1 is good for the Restaurant Group Plc. as it pays the obligations timely. In illustration 2,
quick ratio is increased which shows that it is favourable for company to short term liabilities.
Efficiency ratios:
Efficiency ratio measures the ability of business of using effectively assets and liabilities
to generate sales. This ratio are used for used to evaluate management of the business. If asset
related ratio is high, Restaurant Group Plc. is effective in using minimum amount of assets in
generating sales. If liabilities related ratio is low, management efficiency as it increases accounts
payable. Efficiency ratio includes stock turnover ratio and fixed asset turnover ratio. Stock
turnover ratio means high turnover rate can be achieved by reducing inventory levels. It works
on the principle of just-in -time approach (Zhu and et.al., 2015). Formula is- Cost of goods sold /
Average inventory. Fixed asset turnover ratio is the ratio means high turnover ratio can be
achieved by outsourcing more asset intensive production to Restaurant Group Plc.’s supplier. It
can be achieved by reducing investments in excessive expensive machines. Formula for fixed
asset turnover ratio is - Sales / Average fixed assets.
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2014-15 2015-16
0
10
20
30
40
50
60
70
80
61.27
74.05
Illustration 3: Stock turnover ratio
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2014-15 2015-16
0
0.5
1
1.5
2
2.5
1.59
1.91
Illustration 4: Fixed assets turnover ratio
Analysis:
Efficiency ratio are essential to the organisation as it highlights company's ability to pay
it liabilities within stated time. Stock turnover ratio is better as it is higher in 2015-16 financial
year. It means company will be able to use less inventory to provide support to sales. It means
that less inventory space will be required by the company. This will lead to higher ROI (Return
On Investment) which will make Restaurant Group Plc more liable to increase revenue. Fixed
asset turnover ratio has no particular standard s it measures how well a company is using its
fixed assets in maximising sales. As the fixed asset turnover is increasing in 2015-16 financial
year, it is favourable to company as it shows that company is effectively using its fixed assets to
generate sales.
Gearing ratio:
Gearing ratio means proportion of company's borrowed funds to its equity. The high ratio
indicates that company is using more of debt for payments which is not suitable as it will be
getting towards more financial risk. High gearing ratio represents a high proportion of debt to
equity, whereas low proportion means that low proportion of debt to equity. High proportion
means company has more financial risk and can lend in financial situations. Low proportion
means that Restaurant Group Plc has less financial risk (Damodaran, 2016). More financial risk
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will could lead to risk of bankruptcy. As a result more of financial payments will involve
company in debt arrangements with varied interest rates which will produce more financial risk
to company. Debt equity ratio is part of it.
2014-15 2015-16
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
0.2
0.11
0.18
Illustration 5: Debt equity ratio
Analysis:
Gearing ratio also called debt equity ratio is the concern that company should use
interactive mix of debt and equity. It is important otherwise, it may lend company into
bankruptcy. Debt should be used low in respect of equity. As, debt is loan taken from creditors
which also includes interest in that which increases Restaurant Group Plc's financial risk. Equity,
on the other hand, is the shareholders funds which does not increase liabilities of the organisation
(Robinson and et.al., 2015). But equity should be used in proper manner else shareholders funds
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will be waste which is not a good sign of the Restaurant Group Plc. In 2015-16 year, debt is
more in comparison to equity. So, this not favourable to company. It should be minimised to
make mix of debt and equity.
TASK 4
Covered In PPT
CONCLUSION
It can be concluded from the above report that company has various types of information
available from management accounting. It helps them to have a clear decision-making process. It
aids and helps to make decisions which management takes on the behalf of the facts and figures
provided by financial, income, cash flow etc. which are of utmost importance to company.
Analysis of various ratios and graphs have provided an understanding that company has straong
financial position as its has major profits in past few years. There are many sources have been
available for company to achieve financial resources. It helps them to focus on those areas where
it lacks behind from the competitors. Financial statements help organisation to have an eye on its
expenses and gains. Budgets are required to plan and may be altered when deviation occurs from
the budgeted and actual results. This makes company more vibrant in its approach towards the
accomplishment of its objectives in effectual manner which enhances and makes more profit to
them.
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REFERENCES
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Bujosa, A., Riera, A. and Torres, C. M., 2015. Valuing tourism demand attributes to guide
climate change adaptation measures efficiently: The case of the Spanish domestic travel
market. Tourism Management. 47. pp.233-239.
Chen, S. C. and Shoemaker, S., 2014. Age and cohort effects: The American senior tourism
market. Annals of Tourism Research. 48. pp.58-75.
Damodaran, A., 2016. Damodaran on valuation: security analysis for investment and corporate
finance. (324). John Wiley & Sons.
De Lecea A. M., Smit A. J. and Fennessy S. T., 2016. Riverine dominance of a nearshore marine
demersal food web: evidence from stable isotope and C/N ratio analysis. African Journal
of Marine Science. 38(sup1). pp.S181-S192.
Dolnicar, S. and Ring, A., 2014. Tourism marketing research: Past, present and future. Annals of
Tourism Research. 47. pp.31-47.
Laws, E., 2011. Tourist destination governance: Practice, theory and issues. Cabi.
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growth and carbon emissions: Evidence from panel analysis of the European Union.
Tourism Management. 38. pp.69-76.
Lew, A. A., 2011. Tourism's role in the global economy. Tourism Geographies. 13(1). pp.148-
151.
Medlik, S., 2012. Dictionary of travel, tourism and hospitality. Routledge.
Molz, J. G., 2012. Travel connections: Tourism, technology, and togetherness in a mobile world.
Routledge.
Moutinho, L. ed., 2011. Strategic management in tourism. Cabi.
Reisinger, Y. ed., 2013. Transformational tourism: Tourist perspectives. CABI.
Robinson, T. R. and et.al., 2015. International financial statement analysis. John Wiley & Sons.
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Tham, A., Croy, G. and Mair, J., 2013. Social media in destination choice: Distinctive electronic
word-of-mouth dimensions. Journal of Travel & Tourism Marketing. 30(1-2). pp.144-
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Zhu, J. and et.al., 2015. Targeted serum metabolite profiling and sequential metabolite ratio
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Online
Travel and tourism. 2017. [Online]. Available through: <http://www.careerpilot.org.uk/job-
sectors/travel-and-tourism/what-s-it-all-about> [Accessed on 9th November 2017].
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